Wednesday, June 24, 2009

Supervalu guides down (SVU)

AlphaNinja - Earlier today Supervalu (SVU) announced that earnings would come in "substantially below" the street's expectations, as their customers have become even more value-conscious than previoulsy anticipated. Shares are down 12% on the news.

If you take the consensus earnings estimates for the full year down, the company could still do $500million in free cash flow, which is a 18% yield on its market cap. Sounds nice, but the company has a HUGE debt load of $8.5billion, or about three times the company's market value. The debt load is largely due to Supervalu's purchase of Albertsons.

In the most recent quarter, the interest coverage ratio ([earnings before interest,depreciation, taxes] / interest expense) was about 3 -->> we'll see what it falls to this quarter. According to the company's 10k filing, debt covenants require a coverage ratio of 2.25 through the end of this year, so the company does not look to have a lot of wriggle room. That is likely why the company's FCF is such a high % of its market value-->>high risk, high reward.

As I'm fretting over the company's ability to cover its interest payments, its puzzling (at least to me) that SVU recently increased its dividend and continues to buy back stock in this environment. Either a misdirected focus on capital use or a show of confidence amidst a gloomy environment.

SVU recently hired a talented Walmart exec as its new CEO - hopefully a good move seeing as Walmart's grocery operations are seen as the biggest threat to operators such as WVU, SWY, KR. If we can get some clarity of the safety of SVU's ability to service its debt, this company's shares are a great buy - I'm just no so sure yet.